GST FLYERS

Chapter Twenty Four

Zero Rating of Supplies in

GST
Introduction
What is the need for Zero Rating?
As per section 2(47) of the CGST Act, 2017, a supply is
said to be exempt, when it attracts nil rate of duty or is
specifically exempted by a notification or kept out of the
purview of tax (i.e. a non-GST supply). But if a good or
service is exempted from payment of tax, it cannot be said
that it is zero rated. The reason is not hard to find. The
inputs and input services which go into the making of the
good or provision of service has already suffered tax and only
the final product is exempted. Moreover, when the output
is exempted, tax laws do not allow availment/utilisation of
credit on the inputs and input services used for supply of the
exempted output. Thus, in a true sense the entire supply is
not zero rated. Though the output suffers no tax, the inputs
and input services have suffered tax and since availment of
tax credit on input side is not permitted, it becomes a cost
for the supplier. The concept of zero rating of supplies aims
to correct this anomaly.

200
 Zero Rating of Supplies in GST

What is Zero Rating?

By zero rating it is meant that the entire value chain of the
supply is exempt from tax. This means that in case of zero
rating, not only is the output exempt from payment of tax,
there is no bar on taking/availing credit of taxes paid on the
input side for making/providing the output supply. Such
an approach would in true sense make the goods or services
zero rated.
All supplies need not be zero-rated. As per the GST Law
exports are meant to be zero rated the zero rating principle
is applied in letter and spirit for exports and supplies to
SEZ. The relevant provisions are contained in Section 16(1)
of the IGST Act, 2017, which states that “zero rated supply”
means any of the following supplies of goods or services or both,
namely: ––

a) export of goods or services or both; or

b) supply of goods or services or both to a Special Economic
Zone developer or a Special Economic Zone unit.
As already seen, the concept of zero rating of supplies
requires the supplies as well as the inputs or input services
used in supplying the supplies to be free of GST. This is
done by employing the following means:

a) The taxes paid on the supplies which are zero rated are
refunded;
b) The credit of inputs/ input services is allowed;
c) Wherever the supplies are exempted, or the supplies

201
GST FLYERS

are made without payment of tax, the taxes paid on

the inputs or input services i.e. the unutilised input tax
credit is refunded.
The provisions for the refund of unutilised input credit are
contained in the explanation to Section 54 of the CGST
Act, 2017, which defines refund as below:
“refund” includes refund of tax paid on zero-rated supplies of
goods or services or both or on inputs or input services used in
making such zero-rated supplies, or refund of tax on the supply
of goods regarded as deemed exports, or refund of unutilised
input tax credit as provided under sub-section (3).
Thus, even if a supply is exempted, the credit of input tax
may be availed for making zero-rated supplies. A registered
person making zero rated supply can claim refund under
either of the following options, namely: ––

a) he may supply goods or services or both under bond

or Letter of Undertaking, subject to such conditions,
safeguards and procedure as may be prescribed, with-
out payment of integrated tax and claim refund of un-
utilised input tax credit; or
b) he may supply goods or services or both, subject to such
conditions, safeguards and procedure as may be pre-
scribed, on payment of integrated tax and claim refund
of such tax paid on goods or services or both supplied,
in accordance with the provisions of section 54 of the
CGST Act, 2017 or the rules made thereunder.
As per Section 54(3) of the CGST Act, 2017, any unutilised

202
 Zero Rating of Supplies in GST

input tax credit in zero rated supplies can be refunded,

wherever such supplies are made by using the option of
Bond/ LUT. The difference between zero rated supplies and
exempted supplies is tabulated as below:

Exempted Supplies Zero rated Supplies

“exempt supply” means supply of
any goods or services or both which
attracts nil rate of tax or which
may be wholly exempt from tax
under section 11 of CGST Act or
under section 6 of the IGST Act,
and includes non-taxable supply
No tax on the outward exempted
supplies, however, the input
supplies used for making exempt
supplies to be taxed
Credit of input tax needs to be
reversed, if taken;
No ITC on the exempted supplies
“zero-rated supply”
shall have the meaning
assigned to it in section
16
No tax on the outward
supplies; Input supplies
also to be tax free
Credit of input tax may
be availed for making
zero-rated supplies,
even if such supply is an
exempt supply
ITC allowed on zero-
rated supplies

203
GST FLYERS

Value of exempt supplies, for Value of zero rated supplies

apportionment of ITC, shall shall be added along with
include supplies on which the the taxable supplies for
recipient is liable to pay tax on apportionment of ITC
reverse charge basis, transactions
in securities, sale of land and,
subject to clause (b) of paragraph 5
of Schedule II, sale of building.
Any person engaged exclusively in A person exclusively
the business of supplying goods or making zero rated
services or both that are not liable supplies may have
to tax or wholly exempt from tax to register as refunds
under the CGST or IGST Act shall of unutilised ITC or
not be liable to registration integrated tax paid shall
have to be claimed
A registered person supplying Normal tax invoice shall
exempted goods or services or both be issued
shall issue, instead of a tax invoice,
a bill of supply
Provisional refund: As per section 54(6) of the CGST Act,
2017, ninety per cent of the total amount of refund claimed,
on account of zero-rated supply of goods or services or
both made by registered persons, may be sanctioned on a
provisional basis. The remaining ten percent can be refunded
later after due verification of documents furnished by the
applicant.
Non-applicability of Principle of Unjust Enrichment:
The principle of unjust enrichment shall not be applicable

204
 Zero Rating of Supplies in GST

in case of refund of taxes paid wherever such refund is on

accounts of zero rated supplies. As per section 54 (8) of the
CGST Act, 2017, the refundable amount, if such amount
is relatable to refund of tax paid on zero-rated supplies of
goods or services or both or on inputs or input services used
in making such zero-rated supplies, shall instead of being
credited to the Fund, be paid to the applicant.

******

205